In a boost to cash-starved real estate industry, the Narendra Modi government today relaxed rules for FDI in the construction sector by reducing minimum built-up area as well as capital requirement and easing the exit norms.

The proposal to amend the FDI policy in construction development sector was approved by the Union Cabinet.

In view of depleting FDI inflow in construction and real estate sector in last couple of years, the Cabinet decided to reduce the minimum floor area to 20,000 sq mt from the earlier 50,000 sq mt. It also brought down the minimum capital requirement to $5 million from $10 million.

In case of development of serviced plots, the condition of minimum land of 10 hectares has been completely removed, an official statement said.

Although 100 per cent foreign direct investment was allowed in townships, housing and built-up infrastructure and construction developments since 2005, the government had imposed certain conditions.

"These measures are expected to result in enhanced inflows into the construction development sector... It is likely to attract investments in new areas and encourage development of plots for serviced housing given the shortage of land in and around urban agglomerations as well as the high cost of land.

"The measure is also expected to result in creation of much needed low cost affordable housing in the country and development of smart cities," the statement said.

Although the Cabinet has not reduced the 3-year lock-in period, it has permitted foreign investors to exit on project completion or 3 years from the date of final investment subject to the development of trunk infrastructure.

The government said the relaxation was necessary as FDI inflows in the sector, which witnessed a steady rise during 2006-07 and 2009-10, have started declining.

"To step up investment in construction development with its backward and forward linkages for many other sectors of the economy, it is felt that some liberalisation and rationalisation of the FDI policy...could be the necessary catalyst to give a boost to the sector," it added.

Between April 2000 and August 2014, the construction sector received FDI worth USD 23.75 billion or 10 per cent of the total FDI attracted by India during the period.

Realtors apex body CREDAI president C Shekar Reddy said it would help developers get an alternative route of funding for their projects.

The Cabinet decision amending the existing FDI policy is in line with the Budget 2014-15 announcement.

To boost the development of affordable homes, the Cabinet exempted the conditions of minimum floor area as well as capital requirement if an investee/joint venture companies commit at least 30 per cent of the total project cost for low-cost housing.

The real estate sector has been facing a slowdown since last 2-3 years, leading to liquidity crunch and huge delays in completion of housing as well as commercial projects.

The government said the investment in construction and real estate sector has a multiplier effect on the economy by way of infrastructure creation and employment generation.

The move will help create demand for products of related industries like cement and steel.

"Besides its employment and income generation potential, greater investment in the sector would help to augment the available housing stock including affordable housing and built up infrastructure for different purposes.

"Enhancement of the affordable housing stock is an urgent need in order to stem the proliferation of slums in and around the cities," the statement said.

It added that the commencement of the project will be the date of approval of the building plan/lay out plan by the relevant statutory authority. Subsequent tranches of FDI can be brought till the period of ten years from the commencement of the project or before the completion of the project, whichever expires earlier.

It also said the government may, in view of facts and circumstances of a case, permit repatriation of FDI or transfer of stake by one non-resident investor to another non-resident investor, before the completion of the project. These proposals will be considered by FIPB on case to case basis.

The project would also have to conform to the norms and standards, including land use requirements and provision of community amenities and common facilities, as laid down in the applicable building control regulations, bye-laws, rules, and other regulations of the State Government/Municipal/Local Body concerned.

Further, the government has now clearly defined 'developed plots', 'Floor area' and 'real estate business' to remove any kind of ambiguities.

Further, it added that projects using at least 60 per cent of the FAR/FSI for dwelling units of Carpet Area not more than 60 sq mt. will be considered as affordable housing projects.

In addition, 35 per cent of the total number of dwelling units constructed should be of carpet area 21-27 sq mt for EWS category.

It is clarified that 100 per cent FDI under the automatic route is permitted in completed projects for operation and management of townships, malls/ shopping complexes and business centres.

For the purposes of this policy "developed plots" will mean plots where trunk infrastructure including roads, water supply, street lighting, drainage and sewerage, have been made available, the statement said.

It added that "Real estate business" means dealing in land and immovable property with a view to earning profit or earning income therefrom and does not include development of townships, construction of residential/ commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships.

It clarified that FDI is not permitted in an entity which is engaged or proposes to engage in real estate business, construction of farm houses and trading in Transferable Development Rights (TDRs).